On 29 December 2012, the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) released the Rules on Liability for Repair, Replacement and Return of Family Car Products, adopted at the executive meeting of the regulator held on 27 June 2012 (the "Rules"). The Rules will take effect on 1 October 2013. The draft was released for public comment at the end of 2004. This article is intended to provide an overview of the Rules, examine their impact on the automobile industry and consumers and distinguish "auto warranty" from "auto recalls" and "auto product liability".

Overview of the Rules

With the AQSIQ's promulgation of the Rules on the Liability for Repair, Replacement and Return of Family Car Products (the Rules), Chinese domestic users of family car products will be able to enjoy a series of "warranty" services from 1 October 2013. The Rules consist of 48 articles in 9 chapters and provide for the obligations and repair, replacement and return (warranty) liability of manufacturers, sellers and repairers, as well as dispute resolution.

The Rules distinguish between the "repair warranty period" and "effective warranty period", providing that the repair warranty period shall not be less than three years or 60,000km mileage, and the effective warranty period shall not be less than 2 years or 50,000 mileage, whichever is earlier. Within the repair warranty period, any product quality problem can be repaired free of charge; within the effective warranty period, if satisfying the prescribed conditions for return or replacement of the product, a consumer can demand return or replacement of the product by presenting the "Warranty" and the invoice. Articles 20 and 21 of the Rules provide five circumstances under which a consumer may ask for replacement or return of the product and the seller shall be responsible for the replacement or return. The five circumstances are as follows:

1) Where the car has any such quality problem as includes failure of the steering or braking system, cracking of car body, fuel leaks, etc. within 60 days from the seller's invoice or within 3,000km mileage (whichever is earlier);

2) Where the car has any serious safety problem which persists even after two repairs, or if any new safety problem occurs;

3) Where the engine or gearbox of the car has been replaced twice, or where the same key component of the engine or gearbox cannot work properly even after two replacements due to quality problems;

4) Where the same key component of the steering system, braking system, suspension system, front and rear axles or car body cannot work properly even after two replacements;

5) Where the repair of any product quality problem has exceeded 35 days in aggregate, or the same product quality problem has been repaired for more than five times.

Just as indicated in the title and purpose of the Rules (Article 1 of the Rules), the "warranty" policy mainly focuses on passenger cars purchased and used for personal consumption purpose. So family cars used for leasing or other operating purposes are excluded from the "warranty" services (Article 30 of the Rules); car products which some entities purchase for automobile operations or production activities are also unqualified for the "warranty" services.

The Rules also burden the "warranty" liability on sellers. It is worth noting that after a seller assumes the "warranty" liability as required, the seller will have the right to claim compensation from the manufacturer or any other operator (Article 3 of the Rules). Operators of family car products may enter into a contract to clarify the "warranty" liability for each of them, provided that the legitimate rights and interests of consumers shall not be infringed upon and the "warranty" liability and quality obligations assumed by law shall not be exempted.

The Rules clarify rights and interests of consumers with respect to repair, replacement and return of family car products in auto sales contracts and specify the obligations of automakers, sellers and repairers. This will effectively reverse the increasing trend of disputes and complaints over quality and repair services of family car products in recent years. However, at the time of rejoicing in the institutional progress, we also need to be aware of the Rules' flaws.

Auto Dealers May Be Caught between Two Fires under New Rules

The implementation of the Rules will undoubtedly have an impact on every player in the auto industry chain, with auto dealers standing in the breach, as the Rules provide that the "warranty" liability shall be assumed by the seller under law. Although the Rules provide that "where the liability lies with the manufacturer or other operator, the seller, after assuming the warranty liability as required, shall have the right to recover such compensation from the manufacturer or other operator", in words of Pang Qinghua, chairman of Pang Da Automobile Trade Co., Ltd. "before the promulgation of any detailed rules, dealers will face greater pressure than manufacturers, as Chinese domestic auto manufacturers and dealers do not have equal right of speech. When a dispute over the assumption of the "warranty" liability arises, the dealer is easier caught between two fires."

Especially when an issue of replacement or return of a car product requires joint confirmation by the three parties (consumer, manufacturer and dealer), it is very likely that the dealer will compensate the consumer and then the manufacturer will decline responsibility so the dealer will suffer heavily.

In addition, most circumstances for replacement and return of car products as permitted under the Rules concern spare parts. For example, the circumstance of "the engine or gear box has been replaced for twice, or where the same key component of the engine and gear box cannot be used normally after two replacements due to quality problems; the normal use of the same key component of the steering system, braking system, suspension system, front and rear axles or car body is impossible even after two replacements". Unlike the draft, the new Rules fail to list the categories and titles of the relevant spare parts, or provide detailed standards for their quality. Taking a step back, even if the rules provide relevant information and quality standards for spare parts of car products later, issues of how and who conducts identification remain. By then, another dispute over whether the quality problem is a quality problem of the car itself or a problem caused by improper use of the consumer will arise. The challenge in obtaining evidence for and identification of quality problems will result in car dealers running errands between manufacturers and consumers.

The U.S. Lemon Laws, which provide a remedy for consumers with defective automobiles, charge the replacement and return liability directly onto manufacturers. In China, however, opinions of auto manufacturers have been fully taken into account when opinions were solicited for the "auto warranty" policies. When an auto manufacturer and dealer dispute expenses incurred during the warranty period, according to the Measures on the Sales and Management of Auto Brands, the dealer is always unwilling to upset the manufacturer given its leading position in the auto industry chain. This will increase the capital chain pressure of auto dealers, hindering the long-term development of the auto industry chain.   

Consumers May Find It Difficult to Have Their Products Replaced or Returned Given Insufficient Punishment against Failure in Performing Auto Warranty Liability

The Rules expressly provide that an auto manufacturer shall ensure every family car product it has manufactured contains such documents as Chinese certificate of compliance or relevant certificate and product instructions, warranty, maintenance manual, etc., and when selling a family car product, the seller shall deliver acceptable family car product and invoice to the consumer and express and deliver the product instructions, warranty, maintenance manual, etc. If the said manufacturer or seller violates this provision or commits any illegal act as specified in laws or regulations, the manufacturer or the seller will be punished by law, or warned or ordered to make a correction within a prescribed time limit if not constituting the illegal act as specified in laws or regulations; if the circumstances are serious, a fine between RMB10,000 and RMB30,000 will be imposed.

However, industry insiders believe the fine will fail to deter leading auto manufacturers who each sell over 100,000 vehicles annually at an average of RMB100,000. They are concerned that the low fine level will fail to attach sufficient importance to the rules.

Likewise, many consumers challenged the RMB30,000 cap, complaining the fine is too low to be a burden on auto enterprises. Some consumers also asked how consumers' rights and interests are safeguarded if a car maker pays a fine? The Rules contain no explanation. If a manufacturer is fined due to its failure to provide a warranty card, maintenance manual, etc. and still refuses to provide the same, when the circumstance under which replacement or return of products is allowed under the new Rules arises, the consumer may be unable to proceed with the replacement or return for failure to provide the warranty card.

By contrast, the Provisions on Administration of the Recall of Defective Auto Products provide that automobile manufacturers who "make false report" or "refuse to recall defective automobile products" will be fined above 1% but below 10% of the value of the defective automobile products". Insiders argue that a 10% fine will burden a violating enterprise with a cost of hundred million yuan at most. Such deterrence is far more powerful than the penalty provisions of the Rules.

Distinguishing "Auto Warranty" from "Auto Recall" and "Auto Product Liability"

In addition to auto warranty, concepts related to auto quality include "auto recall" and "auto product liability". All three refer to relevant legal liabilities due to auto quality problems and shall be assumed by the automaker or dealer for consumers. The three concepts, however, differ greatly and need to be distinguished.

"Auto recall" is mainly for the purpose of removing any unreasonable hazard of the same nature universally existing in auto products of the same batch, model or category that could endanger personal or property safety. "Auto product liability" is mainly intended to resolve issues concerning compensation for any personal or property damage caused to a consumer or user due to defective manufacturing, design, instruction, packaging of auto products. It focuses on individual cases that have taken place. "Auto warranty" mainly concerns the contract quality warranty liability which a buyer will require a seller to assume after an auto product fails to meet the quality requirements agreed between the buyer and seller. The three concepts have obvious differences as detailed below.

First, the three concepts have different legal relations. "Auto recall" reflects an administration relation, in which a manufacturer is required to remove any defective problem for a batch of products according to the government's requirements and procedures. "Auto product liability" reflects a tort relation created among a manufacturer, seller and consumer due to the fact that an auto product has caused actual personal and property damage. "Auto warranty" liability reflects a contract relation. It is a contract liability with respect to repair, replacement and return of auto products between a buyer and a seller due to quality problems of the auto products.

Secondly, the three have different legal subjects. The subjects of "auto recall" include government, manufacturer and consumer, among which the manufacturer is the liability subject, and the seller has the obligation of cooperation in the recall. The subjects of "auto product liability" include manufacturer, seller and victim, among which the manufacturer and seller shall hold joint and several liabilities, while the victim includes consumer, user or any other third party to which damage has been caused due to the defective product. The subjects of "auto warranty" are a seller and consumers. The seller is the liability subject, while consumers mainly refer to individuals who use auto products for the livelihood purpose.

Thirdly, the three are caused for different reasons. "Auto recall" focuses on any unreasonable hazard existing in a batch of auto products that may affect personal or property safety. Such hazard may have resulted in bad consequences, but in most case have not caused any actual damage. "Auto product liability" focuses on a specific product defect that has caused actual personal or property damage. "Auto warranty" liability aims at a specific flaw of an auto product which fails to meet the contracted quality.

Finally, the three apply to different automobiles. "Auto warranty" mainly covers family car products. "Auto recall" and "auto product liability" cover any defective family car product or for-operation road vehicle. Subject to the needs for economic development and requirements of the administration of the auto industry, China plans to implement a defective product recall system gradually based on categories of auto products, and have decided to start the implementation from Category M1 vehicles (passenger vehicles with no more than 9 seats, including driver's seat).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.